Middle East
Pointof View
Published by
Deloitte & Touche (M.E.)
and distributed to
thought leaders
across the region.
Fall 2013
Transcending boundaries
Friend or foe?
Gas, Russia and the Middle East
Keep your hat on
Embracing cloud computing
I do. Or do I?
Employee engagement
Seeing the future clearly
Oman's Vision 2020
Fall 2013
Middle East Point of View
Published by Deloitte & Touche (M.E.)
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2 | Deloitte | A Middle East Point of View | Fall 2013
A word from the
editorial team
In one of the opening scenes of the highly acclaimed
1989 movie Dead Poets Society, Robin Williams a.k.a.
Mr. Keating, the new English teacher, stands on his desk
and urges his students to do the same in order to look
at the world from a different perspective and to always
“seize the day,” the moment, daring them to transcend
the sometimes rigid boundaries of tradition and
conservatism imposed on them by their home and
school environment.
Mr. Keating’s unorthodox views and teaching methods
eventually cost him his job, but not before he had
already changed his students’ lives, we are led to
believe, forever.
Transcending boundaries, be they physical or
metaphorical, pervade this issue of Middle East Point of
View. In his enlightening article on Gas, Russia and the
Middle East, Who goes there, friend or foe? Kenneth
McKellar points to the difficulties the two energy
powers have in forging a strong partnership despite the
complementary aspects of their respective gas
businesses.
Ben Hughes, in his article The Project Finance Compass
– East and West, explains how the “irrepressible rise of
the Public Private Partnership as a way of executing
major projects” in the developed economies has yet to
make the leap into the Gulf economies, despite the fact,
he says, that “adopting project finance to fund a PPP
is one of the best ways to achieve sustainable and
profitable, operational growth – even here in the GCC.”
growth so far has been oil, managing the transition to
a more diversified economy is challenging. Fortunately,”
they say, “Oman's government has taken a number
of steps in terms of efficient economic planning and
implementation of various social development initiatives
that have contributed to the success of the Omani
economy.”
Borders of a more physical kind are pointed to by Ralph
Stobwasser and Collin Keeney in their article Risk, why is
it your problem? Stobwasser and Keeney explain how
businesses that are looking towards better prospects
in markets other than their own also face risks of
bribery and corruption, which are brought into sharper
perspective by the rising trend of cross-border regulatory
action and the increasing focus of investors on
governance and transparency.
Employee engagement through corporate volunteerism,
moving out of the IT department and embracing “The
Cloud,” innovation – in and of itself a break through
limitations – and human resources in the region are the
other topics explored in this issue of Middle East Point
of View, which continuously seeks to transcend all
boundaries and bring you insights on the hottest topics
within, and without, the borders of the region.
ME PoV editorial team
Perhaps one of the best examples of transcending one’s
own boundaries in this issue comes from Alfred Strolla
and Phaninder Peri’s article on Oman. Strolla and Peri’s
thorough account of the Sultanate’s development plan
focusing on diversification points out how, “in a midsized, open economy in which the biggest driver of
Deloitte | A Middle East Point of View | Fall 2013 | 3
Contents
In this issue
6
4 | Deloitte | A Middle East Point of View | Fall 2013
Who goes there: friend or foe?
Gas, Russia and the Middle East
Kenneth McKellar
12
The project finance compass
East and West
Ben Hughes
16
Oman
20/20 vision
Alfred Strolla and Phaninder Peri
22
Risk, why is it your problem?
Corruption, money-laundering,
tax evasion and sanctions
Ralph Stobwasser and Collin Keeney
Table of contents
28
“I do. Or do I?”
Employee engagement
Soughit Abdelnour
32
The Cloud
A CIO's survival guide
Basit Saeed
36
Innovation
A chimera no more
Michael E. Raynor and Heather
A. Gray
48
Human Capital Trends
More similar than you think
Ghassan Turqieh
Deloitte | A Middle East Point of View | Fall 2013 | 5
Who goes there:
friend or foe?
Gas, Russia and the Middle East
Russia and the Middle East both supply gas to Europe
and to Asia. In theory that makes them competitors.
They are also both affected by Chinese demand and
North American supply and, in theory, that gives
them a common cause. Should Russia and the Middle
East be enemies or friends?
6 | Deloitte | A Middle East Point of View | Fall 2013
Oil and gas
The effects of growing gas-to-gas competition
The European and Asian gas markets are in flux. Gas-togas competition is rapidly growing in importance, with
lower-priced spot supplies increasingly undermining the
higher-priced long-term supply contracts that have
traditionally dominated the market. As a result, Russia
and the Middle East are being forced to adapt to the
more liberalized practices of European and Asian
markets. On the basis that “a problem shared is a
problem halved” there may be merit in Russia and the
Middle East co-operating to supply these markets in a
way that they have not achieved before.
To achieve this shift in 2011 the NBP attracted 22 bcm
of alternative gas supplies, 85 percent of which was
sourced from Qatar, bringing Qatar’s total share of the
European gas market to over 10 percent. With Belgium
and the Netherlands physically connected to the U.K.
where the NBP lies, European spot price influence is
spreading eastwards towards the German border, where
Russian gas prices have been fixed through long-term
contracts. As a result, the big Russo-German pipelines,
which were necessarily financed by long-term contracts
and have formed the backbone of European supply over
the past 50 years, are operating at less than full capacity.
Long-term, oil-indexed contracts are under serious
scrutiny as overall demand for gas decreases in Europe,
while new, non-Russian, non-Middle Eastern sources
of supply increase. Shale gas in the U.S. has freed up
Liquefied Natural Gas (LNG) – originally designed for
American ports – to address European and Asian spot
markets. As a result, spot prices are now lower than
the oil-indexed prices of Russian and Middle Eastern
contracts, with the result that gas from these sources
has become among the most expensive in the world.
The extent of this shift is illustrated by France, a
champion of nuclear power, increasing its imports to
over 16 billion cubic metres (bcm) despite flat domestic
consumption. Another example of this shift is in the U.K.
where the spot prices at the virtual trading hub there,
the National Balancing Point (NBP), are increasingly
recognized in the market as independent benchmarks.
Key participants in the European gas market have
acted accordingly. Statoil signed a GBP13 billion NBPanchored supply agreement with the U.K.’s Centrica,
which in turn signed a 3.26 bcm per year deal with
Qatar. Spain’s Gas Natural has contracted to receive LNG
based on U.S. Henry Hub prices from 2016-17 onwards,
following BG Group. As a result, in 2011, almost half of
Europe’s gas contracts were concluded outside longterm contracts.
GECF – a GASPEC?
What would happen to liquidity if Middle Eastern
sources were to not supply Europe with current
volumes? A more coordinated supply approach to
Europe would certainly benefit Russia and this is where
a Russian/Middle Eastern axis might play out. Russia is a
founding member, and currently holds the top position,
Deloitte | A Middle East Point of View | Fall 2013 | 7
in the Gas Exporting Countries Forum (GECF) comprising
some of the world’s leading natural gas producers and
exporters. It is not a cartel in the same sense as OPEC
(Organization of Petroleum Exporting Countries) in that
it does not control marginal production in an effort to
influence prices. There are structural differences in
global natural gas and global oil that make this type of
control difficult. Nevertheless, the GECF provides a
venue for its members to discuss topics of interest such
as production projects, exports, etc. Its members –
which include Algeria, Bolivia, Egypt, Equatorial Guinea,
Iran, Libya, Nigeria, Qatar, Russia, Trinidad and Tobago,
and Venezuela – control 36 percent of world production
and 47 percent of global trade. Kazakhstan, the
Netherlands and Norway have observer status at the
GECF. Major natural gas producers that are not affiliated
with the GECF include Australia, Azerbaijan, Canada,
Indonesia, Malaysia, Oman, Turkmenistan, the United
States (the world’s leading natural gas producer) and
the United Arab Emirates.
Spot prices are now lower than the oilindexed prices of Russian and Middle
Eastern contracts, with the result that
gas from these sources has become
among the most expensive in the world
At the first GECF summit held in Doha in 2011, Russia
indicated its keenness for Qatar to focus on Asia and to
market LNG under long-term oil-indexed contracts
rather than to European spot markets. Qatar however,
emphasized its contractual commitments to Europe,
particularly in the face of Russia’s desire to continue to
supply Asian markets. Yet a number of commentators
8 | Deloitte | A Middle East Point of View | Fall 2013
have indicated that the supply of LNG to Asia under
longer-term contracts would be more profitable for
Qatar than the supply to European markets on a spot
basis in the short- to medium-term. Qatar is currently
selling around 36 bcm a year of gas to Asia. Netbacks
on Qatar’s spot LNG sales into Asian markets are around
USD14 per million British Thermal Units (mmbtu),
around twice the figure achieved in the U.K. and
Northwest Europe, where benchmarks are currently
trading at about USD 8/mmbtu.
However the demand situation in Asia is not
straightforward enough for Qatar simply to focus its
efforts there. Asian demand would need to use up to
23 bcm of diverted Qatari LNG from European markets.
On the face of it, this looks possible. The disaster at
Fukushima has increased Japanese demand by some 11
percent. South Korea has been a core demand market
for Qatar for many years. India's geographical location
means that LNG will be its major source of gas supplies,
whilst the maturing gas provinces of Malaysia and
Indonesia are importing increasing quantities of gas
these days. But the swing demand market in Asia is
China, where demand is expected to increase by over
5 percent per annum to 2030. Just because China
needs gas however, does not mean that this gas will
necessarily come from Qatar, or from Russia.
And then there’s China
China has started to diversify supplies effectively by
signing numerous memoranda of understanding with
major suppliers for prospective supplies whilst securing
supplies from Central Asia. Turkmenistan is an important
player, with 30 bcm of Turkmen gas expected to flow
into the Chinese mainland by 2015 (China produced 97
bcm in 2010 and consumed 109 bcm, but its import
needs are set to grow sharply). Additional agreements
towards 65 bcm are in place with Uzbekistan and
Kazakhstan. China-Turkmen prices have fallen to around
USD 6-7/mmbtu and in addition, burgeoning Australian
LNG production (forecast to be the largest in the world
Oil and gas
by 2018) has proven attractive to Chinese buyers.
It is in China’s interest to ration its Qatar LNG imports
at current prices and to allow gas-to-gas competition
to develop further in Europe, as that will help it in
negotiating lower prices with Russia for larger quantities
(up to 60 bcm) in the short- to medium-term and with
Central Asian suppliers in the medium- to long-term. It
may well be in China’s interest to retain Qatar as a
marginal rather than a base-load supplier in order to
force down the price of pipeline gas. Russia has so far
been unable to replicate, in China, the 50 year-old
success that it enjoyed in delivering pipeline gas to
Germany and to the rest of Europe. In the meantime,
China has secured a portfolio of alternative supplies and
has earmarked future domestic shale production of
30 bcm per year.
Given these challenging conditions for both Russia and
Qatar, one option might be for Russia to start limiting
gas sales into Asian markets, ensuring that China starts
to use Qatar supplies as base-load supply. Greater
progress than to date would need to be made in
offering Qatar major Russian upstream swap agreements
and downstream stakes possible in Europe. Any
significant Qatari shift towards Asia will see Russia's
spot market pressures eased in Europe with few other
producers looking likely to substitute Qatar’s supply.
Shale – evolution or revolution?
The second GECF summit in Moscow in 2013 took
place against the background of significant shale gas
production in the U.S., increasing competition for
customers and uncertainty over future gas demand,
prompting some analysts to call current market
conditions the "Dark age of gas." Leonid Bokhanovsky,
the Secretary General of GECF, however changed “Dark”
into an acronym: Development, Affordability, Reliability
and Known (Energy), all attributes of natural gas. He did
acknowledge that the “current challenging areas for all
gas-exporting countries and other energy participants
include vulnerability in the security of demand, energy
policies in place – mainly in consumer countries and
particularly within Europe – and the European Union
plans to diversify its energy supply and to develop local
energy resources."
It is in China’s interest to ration its
Qatar LNG imports at current prices
and to allow gas-to-gas competition to
develop further in Europe, as that will
help it in negotiating lower prices with
Russia for larger quantities
As far as shale gas is concerned, GECF remains of the
view – as does the International Energy Agency, which
represents the OECD (Organization for Economic Cooperation and Development) demand-side countries –
that the shale gas “revolution” has not yet occurred. The
ability to replicate the very favorable conditions under
which shale has been developed in North America,
elsewhere in the world and especially in Europe (where
there are legal constraints for possible development of
resources) is largely unproven, except in the one area
critical to both Qatar and Russia, namely China. A key
assumption underlying the North American shale
“threat” to Qatar and Russia is that North America
will export unfettered volumes of LNG to both
European and Asian markets. However, there are
powerful lobbies – economically, in the form of users
of gas for power generation and industrial feedstock –
and environmentally, in the form of opponents to
hydraulic fracturing, who may curb such exports. This
opposition echoes the many plans a decade ago for
LNG regasification plants for the United States which
never came to fruition.
Deloitte | A Middle East Point of View | Fall 2013 | 9
The ability to replicate the very
favorable conditions under which shale
has been developed in North America,
elsewhere in the world and especially
in Europe is largely unproven, except
in the one area critical to both Qatar
and Russia, namely China
Nevertheless, shale gas has already forced Qatar and
Russia at least to consider, if not implement, alternative
export strategies. North America is no longer (at least
for now) a significant export market for Qatar whilst
Europe and Asia (Qatar and Russia’s target markets)
could be significant import destinations for North
American shale-produced LNG. As far as fuel sources for
power generation are concerned, cheap shale gas is
displacing coal to the extent that coal is now more
attractive for power generation in other parts of the
world.
The Middle East is not just Qatar
Important as Qatar is, there are other major Middle
Eastern countries that we should not forget: Algeria,
Oman, Yemen, Egypt and the U.A.E. together produced
54 bcm of LNG in 2012. Algeria and Egypt are
particularly interesting, given their proximity to European
markets and to Russian alternative supply into Europe.
Algeria may hold shale gas resources much greater than
its conventional reserves, which are already substantial.
In March 2013 Algeria passed a new set of amendments
to its hydrocarbon law to address shale gas in the country.
10 | Deloitte | A Middle East Point of View | Fall 2013
Depending on the development of its unconventional
natural gas resources and its conventional resources,
Algeria could become a more significant natural gas
producer and exporter. However, a difficult business
environment may continue to limit its potential. In 2011,
Algeria produced 79 bcm and exported 51 bcm, with 45
bcm going to the E.U. Although Algeria is focusing on
preserving its resource base and not expanding
production too quickly, with domestic consumption
possibly outstripping exports within the next decade,
Algeria continues to expand its connections to Europe.
In 2011, the Medgaz pipeline from Algeria to Spain was
opened with an initial capacity of approximately 8 bcm
per year. Despite this new addition, Algerian exports to
Spain do not have much direct impact on the rest of
Europe, as the interconnection between Spain and
France is limited. In addition to Medgaz, Algeria exports
natural gas to Europe via the 12 bcm Maghreb-Europe
pipeline to Spain and the 6 bcm Trans-Mediterranean
pipeline to Italy. Algeria has also announced plans to
expand its LNG export capacity.
Since 2005, demand for natural gas in Egypt has been
on the rise, increasing almost 57 percent over the time
period. Although production has grown as well, the
subsidy-driven demand has hindered the government
from offering attractive terms for international
companies to continue developing Egypt’s resources.
Additionally, much of Egypt’s remaining natural gas is
in difficult-to-access, high-cost areas, which contributes
to the lack of interest by many international natural gas
companies. That said, British Petroleum signed a deal in
2010 that was substantially higher than previous
contract terms. Since the resignation of Hosni Mubarak,
Egypt’s natural gas infrastructure in the Sinai Peninsula
has been attacked many times, disrupting gas shipments
via two separate pipelines to Israel and Jordan. Egyptian
exports to the E.U., which are solely in the form of LNG,
dropped almost 12 percent in 2011, after dropping
almost 35 percent in 2010. The Arab Gas Pipeline from
Egypt to Jordan, Lebanon and Syria has been planned to
Oil and gas
extend to Turkey in order to move Egyptian natural gas
to Europe, but given the issues surrounding Egypt’s
natural gas sector this is highly doubtful. Production in
2010 fell for the first time in over a decade, but
stabilized in 2011. With domestic consumption likely to
continue increasing and production probably declining,
exports are not likely to increase for some time. In part
to meet its export commitments, Egypt announced in
December 2012 that it would begin importing LNG,
possibly as early as 2013. Depending on the orientation
of a new government (i.e. whether it promotes Western
investment in Egypt’s energy sector) and whether the
government addresses its natural gas subsidies, this
deterioration of Egypt’s natural gas sector could be
reversed.
It can be concluded that at least in the medium-term,
Algeria and Egypt are unlikely to exert significant
influence in Europe in terms of increased supplies.
The Middle East and Russia: not close enough to
be friends or distant enough to be enemies
The gas map of the world is too complicated,
fragmented and dynamic to enable the forging of a
strong partnership between Russia and the Middle East.
The United States and China also have their own
divergent agendas for gas and these are affecting the
global gas supply/demand balance. The countries of the
E.U. are caught in the middle and, due to their large
number, differing market conditions and geographies,
have never been (and are unlikely to be) able to act as
one single economic bloc with the focused market
power to dictate terms to major gas suppliers.
The gas map of the world is too
complicated, fragmented and dynamic
to enable the forging of a strong
partnership between Russia and the
Middle East
Yet it would be foolish for Russia and the Middle East to
regard themselves as enemies in the global gas market.
They have many complementary aspects to their gas
businesses. One is focused on the delivery of pipeline
gas, while the other focuses on LNG. Both cannot
ignore the supply issues that the U.S. poses, or the
demand conundrum of China. We can therefore
conclude that the relationship between these two key
gas-producing regions will ebb and flow according to
the supply, demand and prices of each gas year. And,
as we know, no gas year is ever the same.
by Kenneth McKellar, Middle East Energy
& Resources Leader, Deloitte Middle East
Deloitte | A Middle East Point of View | Fall 2013 | 11
The project fi
East and West
If there is one defining feature of major public
sector construction projects over the last two
decades in developed economies, it is the
irrepressible rise of the Public Private Partnership
(PPP) as a way of executing major projects. How
does the Middle East, the liquidity-rich Gulf in
particular, compare?
12 | Deloitte | A Middle East Point of View | Fall 2013
Public Private Partnership
nance compass
The key inertia behind any PPP is project finance, the key
funding mechanism required to undertake any major
capital or infrastructure investment. Since 1992, the PPP
Forum estimates that 630 Private Finance Initiatives (PFI)
in the United Kingdom alone have been put in place,
covering an investment of some USD 100 billion. The
U.K. has historically been a forerunner in the field of PPP,
but less so more recently as project finance became too
expensive. Across the Gulf Cooperation Council (GCC),
PPP is at a more embryonic stage. Across the region,
there has been little PPP activity in historically core
PPP sectors such as transport, health and education,
particularly since the crash in 2008. The map below
clearly shows where GCC countries rank in terms of
PPP maturity globally and highlights the need
for a much better regulatory framework.
Comparison of global and MENA countries on PPP maturity
UK
USA
High
Legal and policy framework depth
Singapore
Canada
Australia
Egypt
India
Kuwait
China
Bahrain
Mauritus
Malawi
Nepal
Slovenia
KSA
Oman
UAE
Qatar
Latvia
Low
Low
Experience and track record
High
Source: Markab Analysis
Deloitte | A Middle East Point of View | Fall 2013 | 13
Project finance, in and of itself, is highly volatile with
finance rates ranging from single digit figures to rates
in the mid-teens, depending on a number of variables,
including existing relationships with funders or prior
experience. What this means is that the viability of those
projects funded by project finance are extremely
susceptible to financial market swings or the propensity
to risk afforded by project finance lenders.
Across the Gulf Cooperation Council
(GCC), PPP is at a more embryonic
stage. Across the region, there has been
little PPP activity in historically core
PPP sectors such as transport, health
and education, particularly since the
crash in 2008.
The situation in the Gulf
In the GCC, the opposite is true. Whilst there may be
liquidity in the market, the terms of borrowing are
heavily stacked in favor of loans from the Treasury.
As with most other markets across the globe, project
finance is expensive and unless the financial terms or
the project itself are an attractive proposition to the
private sector, then this will remain the case.
The very nature of a PPP, of course, relies upon the
availability of project finance and the ability for a
scheme to pass a “value for money” test. Traditionally,
PPPs have been an ideal way for the public sector to
transfer risk to the private sector or for those without
the land or capital up front to fund a scheme.
The pass or fail test for the PPP relies on whether value
for money is achieved and affordability underpins this.
However, as the cost of finance has risen, PPPs have in
turn become much more expensive for the public sector.
Governments across the GCC typically have the
resources to fund large-scale capital projects, thereby
obviating the need for project finance in the first place.
Indeed, the very term “project finance” means different
things in each geographic location. Across the GCC,
project financing is typically a short-term, direct funding
stream to facilitate a construction project, typically 3-5
years. This contrasts sharply with the more traditional
term project finance, which is a much longer-term view
in more established PPP markets, such as India, Europe
and the U.S.
When cynicism meets irony
Moreover, there is widespread cynicism about the
viability of PPPs in the region as the majority of PPPs
that actually close are restricted to major Infrastructure,
Water and Power Projects (IWPP). Other PPPs that are
either proposed or under due diligence invariably fail to
close.
PPP deals initiated and closed in the GCC region (2005-2011)
24%
76%
Initiated
Closed
Source: Deutsche Bank, “The challenges and potential for private
financing of infrastructure in the GCC,” May 2011
14 | Deloitte | A Middle East Point of View | Fall 2013
Public Private Partnership
Yet, ironically, at a time when the availability of project
finance has been significantly hindered by the tightening
of global credit markets, calling its viability into question,
there are several factors that could see it, and PPPs, rise
once again to prominence.
Across the GCC, this might be particularly relevant.
While many GCC countries have the financial resources
to facilitate their own projects, they do not always have
the skill base to undertake huge infrastructure projects
and may instead opt to use a PPP to harness the
expertise and appetite for risk of the private sector.
Major IWPP schemes benefit from private sector
involvement, for instance, as the size and complexity of
these projects dictate innovation, significant human
resource and direction. The most notable examples of
this can be found in Qatar, Kuwait and Saudi Arabia
most recently.
Lowest cost driven by market forces
The most obvious mistake is to view the cost of a
project purely in terms of a fixed price established
through the bidding process. As discussed earlier, PPPs
are major, 15-25 year investments funded through
long-term finance. The original rate of borrowing may
be re-financed and/or may change at pre-determined
intervals throughout the course of the borrowing. If
margins at the outset are tight, then the first place to
look is often the build costs, which could have
ramifications in the long-term.
A contractor constrained by bringing in a project on
budget with tight margins might easily look for ways to
cut their own costs, whereas collaboration between two
parties, even in the GCC, may actually become a
mutually beneficial partnership which may derive
enormous long-term advantages.
Of course, choosing a more expensive bid is no
guarantee that such adversarial relationships will not
emerge and careful project management is always a
means by which to avoid this. It is clearly more of a risk
when competition is so fierce.
In the GCC, amidst a backdrop of
political cynicism about PPPs and
their perception of giving control to
the private sector, the argument for
providing genuine value for money
resonates just as loudly as it does in
struggling markets elsewhere
In the GCC, amidst a backdrop of political cynicism
about PPPs and their perception of giving control to
the private sector, the argument for providing genuine
value for money resonates just as loudly as it does in
struggling markets elsewhere. If the public sector in GCC
countries cannot see the potential benefits that a private
sector partner can bring to a major infrastructure
project, then there is little hope for PPP, in the region.
Conclusion
This leads us full circle. Adopting project finance to fund
a PPP and construct a project through a long-term
partnership with the private sector is one of the best
ways to achieve sustainable and profitable, operational
growth – even in the GCC.
The subtle distinction between lowest cost and value
for money must not be lost in the current economic
climate. It is inevitable that cost has become a major
factor, but innovation and flexibility are also needed
to create new ways of getting things done on major
infrastructure projects. By breaking down traditional
barriers of mistrust in the private sector, the right
investors will come to the fore, and with the right
consultant who is experienced in this sector, it is a
recipe for success.
by Ben Hughes, assistant director, Infrastructure &
Capital Projects, Deloitte Corporate Finance Limited
(Regulated by the DFSA), Middle East
Deloitte | A Middle East Point of View | Fall 2013 | 15
Oman
20/20 vision
16 | Deloitte | A Middle East Point of View | Fall 2013
Oman
Once a middle-income economy heavily dependent
on depleting oil resources, the Sultanate of Oman
has been actively pursuing a development plan
focusing on diversification, industrialization and
privatization, with the objective of reducing its
reliance on the oil sector’s contribution to GDP,
currently at 48.44 percent (USD 37.8 billion) and
creating more employment opportunities for the
rising number of young Omanis entering the
workforce. And the outcome? The Public Authority
for Investment Promotion and Export Development
(PAIPED) was recently recognized at the United
Nations Conference for Trade and Development held
in Geneva for its efforts to promote non-oil products.
Deloitte | A Middle East Point of View | Fall 2013 | 17
Vision 2020
The Omani economy had been on a steady
transformation course through development
plans, beginning with the first Five-Year Plan
(1976–1980). At the instruction of His Majesty
Sultan Qaboos bin Said, Vision 2020, a plan
for Oman's economic future up to the year
2020 was set, outlining the country's
economic and social goals, which include:
• Economic and financial stability;
• Reshaping the role of government in the
economy and broadening private sector
participation;
• Diversifying the economic base and sources
of national income;
• Globalization of the Omani economy;
• Upgrading the skills of the Omani workforce
and developing human resources.
The industrial sector has for long been
the foundation of Oman’s long-term
diversification strategy as it is also
capable of meeting the country’s social
development needs and generating
more employment opportunities
18 | Deloitte | A Middle East Point of View | Fall 2013
Growth potential
During the last decade Oman had set apace a reform
program aimed at developing and diversifying the
economy and releasing its potential for growth with
the ultimate goal of promoting development and
competitiveness through increased government
spending on key sectors and stimulating private
investment.
Oman’s economic growth strategy underlines the
development of simple industrial chains, particularly in
basic manufacturing and allied activities as well as other
industries that will enhance the Sultanate’s position and
offer a competitive advantage in the region.
The industrial sector has for long been the foundation
of Oman’s long-term diversification strategy as it is also
capable of meeting the country’s social development
needs and generating more employment opportunities.
There is no doubt that the contribution from industry
has played a significant role in shaping the Sultanate’s
economy in terms of accelerated growth, sustainable
economic and social development and creating new
jobs; however, other sectors such as tourism and gasbased industries, banking and finance, healthcare and
insurance, agriculture, retailing, aviation and recently the
railways project, have also been key components of the
government's diversification strategy (see below).
The mineral industry in Oman, for instance, is on a
strong growth path. Oman’s mineral resources include
chromite, zinc, limestone, gypsum and silicon among
others. A large number of investors have been drawn
into the sector as it is potentially expected to contribute
significantly to the country’s GDP. Several industries have
been developing around the mineral sector as part of
the national development process, which as a result,
has boosted the employment opportunities for a
young Omani workforce as well as contributing to
the nation’s GDP.
Oman
One of the benchmarks for sustainable development
and increased private investment is increased investment
in infrastructure. Accordingly, the continuous
development of Oman’s infrastructure and the
availability of investment funds for such development
projects is a determinant factor for the future growth
of the economy. Government spending during the past
few years on infrastructure projects such as roads,
airports, seaports, hospitals and health centers cannot
be overlooked.
Omanization
Omanization as a national objective is regulated and
monitored in the public sector and, most recently, in
the private sector as well. The government, along with
various industry segments, has initiated training and
development programs to enhance the skills and
competencies of nationals in various fields and promote
the employment of nationals in the private sector. The
aim has been to match the supply of labor locally with
market requirements. It is intended to see Omani
nationals playing a leading role in all areas of
employment – both in trade and professions – in the
Sultanate. The natural consequence of this process has
been the prioritization of education and training.
In-Country Value (ICV) strategy
In-Country Value (ICV), which refers to the total
spend retained in the country to aid in job creation,
development of human resource capabilities and
establishment of industries locally to stimulate
productivity, has been growing in importance in
Oman, particularly in the oil and gas sector.
ICV aims at enhancing the value of goods, services
and skills in the sector and stimulating local production
and manufacturing in order to reduce the imports of
goods and enhance the provision of services in Oman,
thereby reducing dependency on external experts and
improving the skills and capabilities of Omani nationals
by increasing their contribution to the activities of the
oil and gas sector.
One of the benchmarks for sustainable
development and increased private
investment is increased investment
in infrastructure. Accordingly, the
continuous development of Oman’s
infrastructure and the availability of
investment funds for such development
projects is a determinant factor for the
future growth of the economy.
Conclusion
In a mid-sized, open economy in which the biggest
driver of growth so far has been oil, managing the
transition to a more diversified economy is challenging.
Fortunately, Oman's government has taken a number
of steps in terms of efficient economic planning and
implementation of various social development initiatives
that have contributed to the success of the Omani
economy.
Other factors that have contributed to Oman’s success
include the significant rise of foreign investment in many
sectors as a result of competitively low tax rates in the
region. The development of Small and Medium
Enterprises (SMEs) together with ICV strategy lays a solid
foundation for self-reliant industry and modernization
of the economy. Despite the various challenges within
the region and in the country, Oman’s economy is set
on the right path of sustainable growth, development,
diversification and progress.
Deloitte | A Middle East Point of View | Fall 2013 | 19
Industry
• Development of industrial estates in Sohar, Sur,
Salalah, Nizwa and Buraimi.
• The provision of natural gas to the industrial estates
in Sohar and Salalah has helped promote the
expansion of those industries reliant on large
quantities of energy.
• Tax exemptions are an incentive to the development
and expansion of the industrial sector, which
contributes significantly to the country's GDP,
currently at 16.3 percent (USD 12.9 billion).
• The Duqm region is one of the newest industrial
areas growing in prominence with a port and
industrial zone project that will transform the area
into a major economic development center in which
the port will act as facilitator unlocking the potential
growth opportunities. The Duqm port & dry-dock
will be one of the major ports in Oman with its
strategic location. This port is also equipped with a
ship repair yard and dry-dock facility, which is the
first of its kind in Oman.
• Oman has also started to build a rail network that is
expected to link major ports, industrial areas and
free zones at Sohar, Salalah and Duqm with a wider
GCC network.
• An accelerated program to add significant new
capacity to increase the supply of power and water
to meet the rising demand in the Sultanate,
essential for sustained growth and development.
Human Resources
The Omani government has a strong desire to have
Omani nationals play a leading role in all areas of
trading and professional employment in the
Sultanate. As a result, education and training are
prioratized and have been a cornerstone of each of
the Sultanate’s five-year development plans. The
Ministry of Education’s commitment to a sector
that – while maintaining traditional values – is
modern and advanced, is reflected in its range of
educational programs, including the basic education
system, designed to meet the demands of modern
science and culture in the information age.
20 | Deloitte | A Middle East Point of View | Fall 2013
SMEs
• The past few years have witnessed greater
focus on the growth and development of small
and medium enterprises (SMEs) to compete in
the international arena, beyond the domestic
markets.
• Establishment of the Public Authority for Small
and Medium Enterprises Development
(PASMED), an independent body created to
encourage young entrepreneurs and to provide
support in terms of technical, financial,
training, marketing and management, all
necessary fields for aiding these enterprises
during the coming periods.
• The Omani government anticipates sizeable
expansion of jobs created from the development
of SMEs. The planned expenditure on the SME
sector in 2013 is estimated at RO12.9 billion,
almost 30 percent up from 2012.
Tourism
• Tourism is being developed as an important
and sustainable socio-economic sector of the
Sultanate of Oman in a manner that reflects
the Sultanate's history, cultural and natural
heritage and spirit of traditional hospitality.
Tourism will facilitate economic diversification,
the preservation of cultural integrity and the
protection of the environment of the
Sultanate.
• According to the latest statistics, tourism
contributes approximately 2.4 percent to
Oman’s GDP and is expected to increase to 3
percent by 2020. There is a significant increase
in investment in the tourism sector creating
considerable jobs.
Oman
Taxation
In 2009, Oman introduced a new tax law that
consolidates a number of ministerial decisions,
interpretations and practices arising from the
previous 28-year old law, along with the
introduction of certain new tax regulations.
One of the noteworthy changes brought into
the new tax law was the elimination of the
discrimination in tax rates between the
branches of foreign companies and Omani
companies/establishments and the introduction
of a unified rate of 12 percent applicable to all
establishments. Further, under the U.S. Free Trade
Agreement, American companies can register a
limited liability company with 100 percent foreign
ownership without the involvement of a local
partner.
The reduction in tax rates, the amendment to the
definition of “permanent establishment,” which is
now in line with the Organization for Economic
Cooperation and Development (OECD) and the
free trade agreements entered into by Oman, has
encouraged and increased foreign investment in
Oman.
Another major change introduced by the new
tax law is a shift from a territorial system of tax
to a global system of tax, whereby revenue
earned outside Oman is also taxed and which,
consequently, increases the government’s
revenue from tax.
The new executive regulations to the new income
tax law that came into force in tax year 2012 and
apply to all accounting years ending after January
1, 2012, provide clarifications and specify
guidelines and rules in relation to the provisions
of the new tax law.
As part of simplifying the compliance and
thereafter the assessment process, the tax
authorities introduced 18 new different tailormade forms enabling them to collect relevant
information on a timely basis at the time of
compliance, which is expected to speed up the
assessment process. It is worth noting that the
new provisions also include exemptions for small
businesses for filing returns and financial
statements and from mandatory tax registration
and compliance on fulfillment of certain
conditions. Tax deductions now require more
detailed documentation than in the past.
Provisions of penalty for non-compliance
introduced in the new tax law are likely to be
implemented soon.
With implementation of Islamic finance
regulations, the tax authorities are currently
reviewing the tax laws and are likely to introduce
amendments to accommodate the effect of the
Islamic finance transactions.
Various service improvement measures to tax
payers have already been, or are in the process of
being implemented. These include establishing a
Large Tax Payers Unit (LTPU), online portals and
revamping of the tax system among others.
by Alfred Strolla, managing partner, Oman, Sudan and
Yemen, Deloitte Middle East and Phaninder Peri,
senior manager, Tax, Deloitte Middle East
Deloitte | A Middle East Point of View | Fall 2013 | 21
Corruption, money laun
Risk, why
22 | Deloitte | A Middle East Point of View | Fall 2013
Risk
ndering, tax evasion and sanctions
is it your problem?
As businesses continue to face a challenging
economic environment in most developed economies
and are looking towards rapid-growth markets with
potentially better prospects, they also face the risk of
higher levels of bribery and corruption. The rising
trend of cross-border regulatory action and the
increasing focus of investors on governance and
transparency have brought these risks into sharper
perspective. Leading companies are responding with
enhanced compliance and due diligence measures,
robust internal audits, enhanced investigative
capabilities, whistleblowing and leveraging off the
latest data analytical tools. The precautionary adage:
better safe than sorry, has never been more pertinent.
Deloitte | A Middle East Point of View | Fall 2013 | 23
In a recent panel discussion hosted by Deloitte on the
subject of “Risk, why is it your problem?” it emerged
that corporate counsels in the region have two
immediate concerns related to navigating the challenges
that come with operating in an international business
environment over the next 6-12 months: the increased
volume and complexity of international regulatory and
legal obligations on the one hand, and the risks
associated with expansion into new markets on the
other. Those two factors frequently converge –
especially when the expansion involves emerging or
lesser-developed markets where prevailing local business
practices are at odds with international norms. With
that tension comes one very large risk: the risk of the
company committing an act that yields a cross-border
regulatory enforcement action.
Attendees were especially concerned about the
reputational damage, fines and profit disgorgements
that can accompany non-compliance with cross-border
regulations. This is notably acute for those expanding
into emerging markets where pressures to establish and
grow their business in a new market frequently raise
challenges with regard to regulation and compliance.
There are numerous ways that
companies and the individuals who
run them can brush up against the long
arm of the U.S. authorities. Examples
of current priority matters for U.S.
authorities include corruption, money
laundering and tax evasion.
24 | Deloitte | A Middle East Point of View | Fall 2013
The impact of cross-border business practices are placed
in even sharper perspective through an increasing trend
under the Foreign Corrupt Practices Act (FCPA) of
prosecuting executives and individuals with control
responsibility over organizations that have violated anticorruption legislations.
What are the cross-border enforcement priorities
that companies should be concerned about?
There are numerous methods that companies and the
individuals who run them can brush up against the long
arm of the U.S. authorities. Examples of current priority
matters for U.S. authorities include corruption, money
laundering and tax evasion.
Corruption - The driving force of anti-corruption
enforcement continues to be the U.S. Securities
Exchange Commission (SEC) and U.S. Department
of Justice (DoJ) through the FCPA, with recent fines
amounting to over USD 2.7 billion between 2010-2012.
In 2012 the SEC and DoJ collectively enforced actions
against 23 corporations. During the first six months
alone of 2013, 17 actions have been enforced. With the
passing of the U.K. Bribery Act in 2010 and the
aggressive promotion of anti-corruption legislation
by Organization for Economic Cooperation and
Development (OECD) countries, bribery and corruption
are appearing increasingly on the agenda of
governments around the world. Although enforcement
of the U.K. Bribery Act has gained little public traction,
the Act does give the U.K. Serious Fraud Office
sweeping powers to prosecute bribery anywhere in
the world and thus compliance with it needs to be a
headline issue for companies with U.K. connections,
irrespective of the geography of their operations.
Money laundering - Anti-money laundering regulations
have yielded U.S. authorities some of the largest fines
on record, underscoring the challenge that international
financial institutions face in enforcing consistent
compliance of policies across widespread and looselyintegrated overseas networks. However, it is not just
extra-territorial enforcement that organizations face,
local authorities are also tightening their regulations.
Risk
The Dubai Financial Services Authority (DFSA), for
instance, has just published a new Anti Money
Laundering (AML) rulebook, which came into force
on 14 July, 2013. As anticipated, this rulebook places
significant focus on a “risk-based approach” and on
the assessment of money laundering risk, in terms
of both business risk and customer risk assessment.
Organizations operating in the Dubai International
Financial Center (DIFC) will need to familiarize
themselves with the changes in the regulations.
Tax evasion - Another U.S. law designed specifically
with cross-border enforcement in mind is the Foreign
Account Tax Compliance Act (FATCA). FATCA, designed
to prevent tax avoidance of U.S. citizens abroad through
foreign (non-US) financial institutions (FFIs) will begin to
be implemented in 2014, is and should be an immediate
and current concern for any financial services institutions.
The Act requires FFIs and non-US non-financial entities
to identify and disclose their U.S. account holders and
members or face a new 30 percent U.S. withholding
tax. The U.S. Internal Revenue Service (IRS) expects the
Act to raise USD 7.6 billion in tax revenue over a 10-year
period (and perhaps a small fortune in fines as well), and
will have a direct and profound impact on FFIs that have
any U.S. proprietary investments, account holders, or
financial dealings. Compliance with FACTA will require
organizations in the financial services sector to
implement enhanced Know Your Client (KYC) and
AML due diligence and acquire deeper knowledge
of IRS rules.
Economic and trade sanctions - Particularly relevant in
the Middle East – given the region’s history as a trading
entrepôt and the presence of sanctioned regimes – are
the host of laws and regulations controlling trade and
flow of funds that add an additional layer of risk and
complexity to conducting business internationally. These
laws, covering a range of goods and services, target an
even wider range of regimes, organizations and
individuals even. Authorities such as the U.S. Office of
Foreign Assets Control (OFAC) are aggressively
Violating anti-corruption, tax evasion,
money laundering, trade sanctions or
human rights laws are examples of a
handful of different ways that a
company can tarnish its reputation
through careless overseas activities
employing new tools to more closely and effectively
implement sanctions, such as prohibiting international
banks from accessing U.S. dollar markets if they are
considered to be providing financial services to entities
on sanctions lists. OFAC in 2012 completed or settled
16 enforcement actions and collected penalties of over
USD 1.1 billion. There is no sign that OFAC’s vigor is
dying down.
How can companies avoid being the next
headline story?
Reputation is key to every organization – it is good to be
in the news, but only for the right reasons. Once
damaged, reputation can be very difficult to repair,
particularly where integrity is called into question.
Violating anti-corruption, tax evasion, money
laundering, trade sanctions or human rights laws are
examples of a handful of different ways that a company
can tarnish its reputation through careless overseas
activities. Allegations of corruption seem to get the most
attention recently, because of the high-value fines being
doled out by the U.S. authorities, as well as their
eagerness to cast the broadest shadow possible. Risks
are increasing, but standards are not. It seems there are
few companies who can truly claim to be exempt from
U.S. oversight.
Deloitte | A Middle East Point of View | Fall 2013 | 25
Companies should prevent being
caught by surprise with an overseas
authority brandishing a statute they
never thought would apply to them
Third-party due diligence - FCPA corruption
settlements frequently cite the role of third-party agents
such as vendors, joint venture partners, government
liaisons, customs and immigration agents and acquired
entities in alleged violations. Although we are seeing a
greater reliance on outsourcing key functions to thirdparties, especially in emerging markets, it is no longer
possible to circumvent risk through a third-party.
Determining the potential risk of third-party corruption
requires organizations to consider factors such as the
type of third-party with which they are planning to
engage, the services to be provided, the locations in
which parties operate and the level of interaction that
they may have with the public sector.
Organizations looking to expand into new markets
should regularly perform integrity and corruption due
diligence on third-parties and should ensure that they
conduct KYC procedures on new clients to ensure
compliance with anti-bribery and corruption and AML
regulations.
Compliance culture and “tone from the top”
To avoid falling foul of the FCPA or any of the local
authorities who are increasingly joining the enforcement
bandwagon, organizations and executives responsible
for compliance can take a number of steps – including
demonstrating a strong “tone from the top” approach
26 | Deloitte | A Middle East Point of View | Fall 2013
and implementing a robust corporate governance
framework containing a defined ethics and compliance
policy. Officers, directors and employees should be
issued guidelines, policies, and should be regularly
trained on anti-bribery, anti-corruption (ABC)
compliance. Potential risks should be highlighted to
employees and suppliers, whilst compliance covenants
should be included in contractual agreements.
Internal risk assessment and risk management Another proactive step that companies can take is to
conduct risk assessments. This is critical in any area of
compliance concern (be it corruption, fraud,
environmental or other) and includes conducting
reviews of operations, comparing the objectives of
controls with individuals’ understanding of those
controls and their responsibilities, identifying deficiencies
and developing a prioritized action plan to plug any
gaps. Furthermore, implementation of a whistleblowing
hotline and regular reviews of compliance with an
understanding of the firm’s policy are all crucial to
demonstrate to authorities that organizations are
committed to compliance and that any violations are
the result of individual or “rogue” action, rather than
the result of shoddy controls or, worse, corrupt business
practices.
The US Dodd-Frank Act poses a significant
challenge to companies operating in the
crosshairs of U.S. regulators. Provisions for
whistleblower protection and reward mean that
every company needs to be especially diligent
about implementing a robust compliance
program. A fundamental component of that
program should be a whistleblowing program
that encourages employees to report their
concerns internally, rather than succumb to the
temptation to report externally and seek a
reward from the U.S. authorities.
Risk
Companies should also consider including a broader
review of fraud risks in any corruption risk assessment
and vigorously investigate any potential violations.
Organizations should be aware that would-be makers
of corrupt payments frequently use methods that mirror
other forms of fraud thus, an emphasis on fraud in the
corruption risk assessments may help tighten down
controls in areas that might escape the attention of the
anti-corruption compliance teams. Proactively tackling
any corruption or fraud identified within an organization
embeds the notion that the company is attentive to the
subject. The knowledge that someone is watching is in
itself the greatest deterrent to would-be perpetrators of
any number of potential violations.
Whistleblowers - Another significant piece of U.S.
legislation that is likely to have significant ramifications
on extra-territorial enforcement is the Dodd-Frank Act. A
component of Dodd-Frank is a whistleblower protection
and reward program that effectively offers a bounty to
whistleblowers who take their allegations directly to the
SEC/DoJ (should their allegation yield a fine to either
authority). The policy allows employees to disclose
information without fear of reprisal, thereby enhancing
corporate transparency and accountability. It however
also encourages employees to report concerns internally
(rather than externally) which can lead the company to
self-investigate and report if necessary.
Given these pressures, it may well be that non-U.S.
companies should consider implementing a new form of
risk assessment: the risk of U.S. regulatory action to
establish a clear and complete picture of the different
ways in which they may be exposed to cross-border
enforcement by significant overseas regulators, and
evaluate the controls and monitoring mechanisms they
have in place to alert themselves to risk as it arises.
Companies should prevent being caught by surprise
with an overseas authority brandishing a statute they
never thought would apply to them.
Growth and expansion can no longer
be separated from corporate awareness
and ethical conduct
In light of the growing emphasis on cross-border
enforcement and the very direct impact it can have on
the control persons within an organization, the question
arises: who should be responsible for these risks within
an organization? While it is certainly important to have a
broad range of staff trained on matters of critical risks
and to generally raise risk awareness within an
organization, there may be no “one size fits all” risk
framework applicable to all companies and industries. It
is important that the risk management framework is fit
for purpose and each organization should be aware of
the risk factors most relevant to it and its industry.
Assessing what is appropriate can be complex and many
companies seek external advice to ensure that they are
benchmarked appropriately. Going forward, it may be
important to include in that benchmarking the
company’s awareness and attentiveness to the complex
web of international regulations to which they may be
exposed. Growth and expansion can no longer be
separated from corporate awareness and ethical
conduct.
by Ralph Stobwasser, director, Forensic, Deloitte
Corporate Finance Limited (Regulated by the DFSA),
Middle East and Collin Keeney, director, Forensic,
Deloitte Corporate Finance Limited (Regulated by the
DFSA), Middle East
Endnotes
1 Held at Legal Week’s 6th annual Middle East Corporate Counsel
Forum in Dubai on 15 May, 2013.
Deloitte | A Middle East Point of View | Fall 2013 | 27
Employee engagement
“I do.”
Or do I?
Over the last decade the business world has shown
significant interest in the concept of employee
“engagement.” Identified as an internal state of
being – physical, mental and emotional – employee
engagement brings together concepts of work effort,
organizational commitment, job satisfaction and
optimal experience. But does the social engagement
of employees lead to a lasting and successful
marriage? Yes, says this author.
Deloitte | A Middle East Point of View | Fall 2013 | 29
Employee engagement is about being positively present
at work by willingly contributing intellectual effort,
experiencing positive emotions and meaningful
connections to others. This gives employee engagement
three dimensions:
• Intellectual: related to the job and how to enhance it;
• Affective: linked to feeling positive about doing a
good job; and
• Social: concerned with taking opportunities to discuss
work-related improvements with others at work.
Perhaps one of the most distinctive
characteristics of Gen Y is their search
for ‘meaning’ in the work place, a
platform that encourages them to
contribute to society
Deloitte’s Volunteer IMPACT 2011 survey found
that Millennials who frequently volunteer are
more likely to be proud, loyal and satisfied
employees as compared to those who rarely or
never volunteer. The same research showed that
those who participate in employer-sponsored
volunteerism were 52 percent more likely to feel
very loyal toward their company than those
who did not participate. The report also found
that 70 percent of Millennials want to work for
a company that is committed to its community.
Of all Millennials surveyed, 61 percent said that
whether an organization were committed to its
community and sponsored volunteerism, would
have an influence on whether they accept a job
offer or not (Deloitte, 2011).
30 | Deloitte | A Middle East Point of View | Fall 2013
Extensive studies have demonstrated the importance of
employee engagement to organizational performance as
a business concept that addresses employees’ levels of
interest and commitment to the job, resulting in a
positive attitude towards one’s occupation and firm and
consequently leading to greater productivity. Gallup’s
Q12 Meta-analysis of 1.4 million employees conducted
in 2012 and examining business performance, shows a
positive correlation between employee engagement and
business outcomes despite tough economic conditions.
More specifically, Gallup found that engaged employees
are more productive and customer-focused, as well as
more likely to stay with their employers (Gallup® and
Q12®, 2013).
Enter the Millennials
The study, which covered different dimensions of
employee engagement, shows that employee
engagement with corporate volunteerism is increasingly
being identified as a key element in attracting and
retaining top talent (see box). This correlates tightly with
a prevailing characteristic of the current Generation Y, or
the Millennials: defined as being between the ages of
21 and 35, the fastest growing segment in today’s
workforce and the most sought after talent despite the
prolonged recession. Perhaps one of the most distinctive
characteristics of Gen Y is their search for meaning in
the work place, a platform that encourages them to
contribute to society. It is important to understand and
engage with members of the Millennial generation as
they will represent the bulk of the workforce, the future
of economic and social life and the future of business.
While many have claimed that employee engagement
predicts employee outcomes, organizational success and
financial performance, a considerable number of leaders
question the return on investment (ROI) in terms of the
amount of time and resources spent trying to address
employee concerns. In fact, some observers warn that
fixating on ever higher engagement survey scores is
wrongheaded and may backfire if employers fail at
improving the metrics and ensuring that their more
“engaged employees” are behaving in ways that
promote higher productivity.
Employee engagement
The importance of social engagement
Recognized or not, without a motivated and engaged
workforce, even the most brilliant business strategies
can falter. The affinity that employees feel toward an
employer has the power to create a competitive
advantage that can be hard to imitate and is inextricably
linked to organizational performance (Deloitte, 2011).
Studies indicate that organizations that have engaged
employees actually outperform those who do not. In
fact, employers who take into account the connection
between corporate volunteerism and employee
engagement can reap substantial rewards. By
sponsoring volunteerism, a company has the
opportunity to communicate the values it shares with its
employees, which in turn can result in a more engaged
and committed workforce that drives the firm’s
competitive advantage (Madison, 2012).
Companies seeking to enhance organizational
commitment by means of volunteerism may have more
success if their employees have the freedom to select
from a wide array of volunteer opportunities. This is
driven by the increased agreement with organizational
values and increased perception of the organization
that employees report as a result of participating in
employer-sponsored volunteerism (Madison, 2012).
I do. Do you?
At the moment, employee engagement initiatives
addressing community involvement and corporate
volunteerism are being incorporated into the backbones
of leading organizations. Forward-looking companies
seeking a lasting “marriage” with their employees are
encouraged to embrace the trend and establish social
engagement as a differentiating agent of their firms.
These organizations should emphasize the importance
of employee engagement through offering a holistic
kind of experience to their workforce and aligning with
their passions if they wish to retain the talent that other
firms are competing for.
While many have claimed that
employee engagement predicts
employee outcomes, organizational
success and financial performance,
a considerable number of leaders
question the return on investment
(ROI) in terms of the amount of time
and resources spent trying to address
employee concerns
Endnotes
Barton, F. E. (2012) The Millennial consumer - debunking
stereotypes. The Boston Consulting Group.
Deloitte, D. L. (2011) 2011 Executive summary Deloitte volunteer
IMPACT survey. Deloitte Touche Tohmatsu Limited.
Frauenheim, E. (2011, September) A skeptical view of engagement,
workforce. Retrieved from Workforce Website:
http://www.workforce.com/article/20091202/NEWS02/312029985/askeptical-view-of-engagement?AID=20091202/NEWS02/312029985#
Gallup® and Q12® (2013) Engagement at work: its effect on
performance continues in tough economic times. Gallup, Inc.
Harter, N. B. (2011) Majority of American workers not engaged in
their jobs. Gallup® and Q12®.
Khan, W. (1990) Psychological conditions of personal engagement
and disengagement at work. Academy of Management Journal, Vol.
33, pp. 692-724.
Madison, W. R. (2012) Corporate social responsibility, organizational
Commitment, and employer- sponsored volunteerism. International
Journal of Business and Social Science, Vol. 3 No. 1.
by Soughit Abdelnour, senior manager, Human
Resources, Deloitte Middle East
Deloitte | A Middle East Point of View | Fall 2013 | 31
The Cloud
A CIO’s survival guide
Despite a grand entrance into the technology
arena, cloud computing has become a point of
contention in some organizations. While some
department leaders have bypassed their trusted
IT departments completely and procured
services directly from cloud providers to address
immediate needs – claiming reduced costs, faster
time to market and improved user experience –
some CIOs are not convinced. So how does a
CIO survive and remain relevant within the
organization if the cloud is viewed as a threat to
their existence? Embrace the cloud and evolve
your value proposition.
32 | Deloitte | A Middle East Point of View | Fall 2013
Cloud computing
Cloud computing entered the technology arena with
great fanfare and promise, presenting a paradigm shift
in how technology would be offered – and consumed –
and promised to demystify what IT departments across
the globe actually do in their “top secret” data centers
to make today’s companies run with such intelligence
and agility.
Although technology providers have remained fully
committed to investing in cloud capabilities, with many
changing their entire business model to expand their
cloud solutions and capabilities, many Chief Information
Officers (CIOs) are still not convinced and are waiting for
the buzz to pass. But several years into the paradigm
shift, the topic remains very much alive and has become
even more relevant, not only for Chief Information
Officers but also for Chief Financial Officers, Chief
Marketing Officers and many Chief Executive Officers as
they struggle to align the ever-so-growing appetite for
technology in the modern enterprise with all the
complicated technology costs and processes that
continue to grow year on year.
understood by anyone but the CIO. System licensing
models, capacity planning forecasts, software support
contracts, business continuity configurations and nonproduction landscapes are lively conversations when
explaining the total cost of ownership to a department
leader sponsoring a new business initiative. In contrast,
the cloud offerings seem almost too simple. You
determine what you need, for how many users and the
method of payment. At times it can really be that simple
but in most cases there are additional items to consider
and should be fully evaluated in advance of any
commitment. What is a technology leader to do when
their CMO requests a global media streaming solution
to allow real-time presentations, knowledge sharing
and improved corporate training within six months and
presents the request with board approval and funding?
This will require new skills, new technology and possibly
a revamp of the entire infrastructure. However, the
budget approved only covers a fraction of what is
needed and was based on marketing material from a
cloud provider and monthly pricing presented on the
provider’s website. For technology leaders they will not
know where to start.
In many organizations it has almost become a weapon
of sorts, with CFOs threatening IT budgets with the
cloud and CIOs aggressively combating the claims of
their own trusted providers with arguments of unique
capabilities and protection that can only be provided by
their internal experts.
In many companies it may not quite happen this way
but for many this is how expectations are first set.
As the CIO, do you admit defeat and walk away? Let
the CMO bring in their preferred vendor and remove
yourself from the conversation?
The cloud discussion in many organizations starts as a
financial opportunity to drive efficiency into technology
spend that is immensely complicated and never fully
Never. If anything, the CIO should wear the internal hat
of cloud expert, never the anti-cloud lobbyist. Become
well versed in what the market offerings are proposing
Deloitte | A Middle East Point of View | Fall 2013 | 33
and how. Understand how they can be leveraged within
your company, the pitfalls as well as the hidden costs
and considerations. Update your enterprise architecture
and strategy to consider cloud technologies and how
they will fit into the broader landscape for business
intelligence, reporting and data protection. In some
cases, selecting a cloud offering is the only feasible
solution. Prepare for this in advance. Be the first person
engaged when a cloud idea arises, put in place the
necessary controls and capabilities that will prevent
the cloud from disrupting what is already in place and
working today and champion the change across the
organization.
As the CIO, do you admit defeat and
walk away? Let the CMO bring in their
preferred vendor and remove yourself
from the conversation? Never. If
anything, the CIO should wear the
internal hat of cloud expert, never the
anti-cloud lobbyist.
Many technology leaders spend endless hours ensuring
that all systems are built to last and performing as
expected. Systems are up and running, sufficient
capacity is on hand, operating procedures are in place,
all while keeping a close eye on variable costs. In the
cloud-enabled world you may not be as involved in
the daily details of operating such technical elements.
However, someone has to be aware of what is
happening every day. Are services meeting the
contracted levels of performance and stability? Are
business and user expectations being met? As the CIO
34 | Deloitte | A Middle East Point of View | Fall 2013
and custodian of all things technology, embrace this
opportunity to become the broker between your
business and cloud providers. You may not own the
assets nor have visibility in how they are operated but
you do have the responsibility of ensuring the business
is realizing the value of their investment. Put in place
strategic vendor management disciplines that
consistently measure the cloud provider’s performance
with effective controls that drive accountability.
Benchmark their performance and capabilities against
competitors and ensure that the needs of your business
are clearly understood and delivered upon. This may feel
closer to a procurement officer role but as the trusted
technology expert, the CIO is best positioned to
interface with cloud providers and manage the
commercial relationship on behalf of their business.
Do not compromise on expectations and results
because the service is being managed externally.
What happens if the cloud turns to rain?
The greatest fear and hold off for most organizations
adopting cloud services is the loss of control. Mature
providers have responded well to this concern and
offer very comprehensive and stringent agreements
that cover the best interest of any organization with
the appropriate recoveries, penalties and warranties.
But what do you do when disaster strikes? Do not
wait for the unforeseen, be proactive.
• Governance and controls - Alongside the effort to
update the enterprise architecture and strategy,
revisit governance processes, security standards and
compliance programs to ensure that cloud-based
services are considered and provisioned for. Put in
place specific standards that must be complied with
for all cloud-based services, detail requirements that
must be met to uphold security posture and be explicit
on what must be considered prior to committing to
any service. This should not evolve into a situation in
which cloud services will never qualify, but rather a
guideline of how to proceed and what to watch out
for. If anything, this should simplify the review and
selection process.
Cloud computing
• End users - The ever-growing popularity of BYOD
(Bring your own device) and mobility solutions has
introduced many consumer-focused solutions that are
leaking into the enterprise. It is very challenging to
stay ahead of all the solutions and services that are
being downloaded by users every day. An easier
approach to adopt is one of education and policy.
Help users understand how to protect themselves and
their employer in the digital world. Define usage
policies that clearly articulate how information should
be handled, shared and protected. Make it simple but
make it clear.
• Business continuity and exit - Establish a plan for the
worst-case scenario. Implement an exit strategy that
ensures that you have access to your information and
the ability to recover from a technical or relationship
crisis. Understand the impact and planned reaction in
the event of a major failure and test this. Test the
security, privacy controls and procedures of the cloud
provider to understand the potential for exposure or
breach. As the guardian and protector of all digital
assets, ensure that data hosted outside of your control
is included in your risk management reviews, security
assessments and planning.
As the trusted technology expert, the
CIO is best positioned to interface
with cloud providers and manage the
commercial relationship on behalf of
their business. Do not compromise on
expectations and results because the
service is being managed externally.
The cloud has come a long way and will continue to
evolve in capability and relevance. It will force change
within organizations and disrupt business-as-usual for IT
departments across the globe. However, the cloud will
not replace enterprise IT departments. To fully realize the
potential, prepare your organization and yourself to
capitalize on this window of opportunity. Lead the
change through proactive planning, embrace the
change through increased knowledge and participation
and embed the cloud within your IT strategy with
effective standards, controls and measurements.
by Basit Saeed, Chief Information Officer, IT,
Deloitte Middle East
Deloitte | A Middle East Point of View | Fall 2013 | 35
36 | Deloitte | A Middle East Point of View | Fall 2013
Deloitte
Oil and
Review
Gas
Innovation
A chimera no more
Innovation is celebrated far and wide, but the lack
of a shared, accurate definition has undermined
our collective ability to manage it effectively.
The implications are anything but academic.
Companies that treat an attack based on
differentiation as if it were breaking important
trade-offs may overreact, but mistake a true
innovator for the merely different and the pain
can last for decades.
Deloitte | A Middle East Point of View | Fall 2013 | 37
Like the old chestnut of the bumblebee’s flight,
innovation seems to work in practice but not in theory.
There are myriad examples of success from which we
can draw inspiration, yet almost no one seems able
to innovate repeatedly and on purpose. Practitioners
continue to lament the unpredictability of innovation,
the more Zen-like among them embracing the idea that
failure is inevitable. Who hasn’t been told something
to the effect that if you’re not failing often, you’re not
trying hard enough? It’s difficult to know if this is
powerful advice or just defeat cloaked in the rhetoric
of victory.
In such circumstances, it is common practice to invoke
the parable of the six blind men and the elephant, with
the hope that progress lies in synthesizing the many
and divergent views. Unfortunately, such a path is not
available to those who wish to understand innovation,
for this field of inquiry faces a much more fundamental
problem: where the blind men knew that they each
had purchase on the same animal, when it comes to
innovation, many of us hold parts of entirely different
beasts.
Think of the variety and diversity of initiatives in most
organizations that seek to bask in innovation’s golden
light. From disruptive new product initiatives to efforts
to introduce recyclable cutlery in the commissary, there
is precious little that doesn’t seem to qualify. It is not an
elephant we seek to describe, but a menagerie. Imagine
now the sightless six grasping, respectively, the wing of
a condor, the body of a lion, the horn of a rhino, and
the fluke of a whale. It is unsurprising, if disappointing,
that our efforts to make innovation manageable have
conjured only chimeras.
If we are to become similarly effective
at managing innovation, we need to
define what it is in practical, useful
terms. Only then can we assemble the
parts of the creature that truly belong
together.
38 | Deloitte | A Middle East Point of View | Fall 2013
Few other fields in applied management labor under this
burden: hedging financial risk belongs to finance, while
motivating and rewarding employees falls to a subfield
within human resources and reducing the variation in
the output of a manufacturing process belongs to
operations management. Managers can be effective in
these domains largely because the implicit or explicit
definitions that limn the boundaries of each tell them
what they need to know in order to achieve specifiable
outcomes and how to improve over time. If we are to
become similarly effective at managing innovation, we
need to define what it is in practical, useful terms. Only
then can we assemble the parts of the creature that
truly belong together.
More than a harmless drudge
Establishing a useful definition to guide any field of
inquiry is not an esoteric exercise but the most practical
of first steps. Unfortunately, it is a step we have yet to
take for innovation, which has been plagued, almost
since its inception, with far too broad a notion of what
it might encompass.
The trouble began with the seminal work of Joseph
Schumpeter in the 1930s and 1940s. Almost singlehandedly, the Harvard economist convinced a discipline
obsessed with marginal cost competition that what
really mattered was innovation, which he defined as
“the introduction of new goods…new methods of
production… the opening of new markets…the
conquest of new sources of supply…and the carrying
out of a new organization of any industry.”1
Consider now what this definition places within
innovation’s remit. Do we really think that finding a
Chinese distributor for CAD software (opening new
markets) requires the same sort of management
processes as shifting from bricks to clicks in the retail
sector (establishing a new organization)? Does exploring
digital fabrication or additive manufacturing (3-D
printing as a new method of production) raise
challenges that are sufficiently similar to those arising
from finding substitutes for rare earth metals in the
high-tech sector (new sources of supply) that they can
be treated as one and the same?
Deloitte Review
A reasonable question is whether having a common
definition matters all that much. Can’t we follow the
lead of Potter Stewart, a late Justice of the U.S. Supreme
Court, who famously averred that when it came to
obscenity, he knew it when he saw it?2 As a practical
matter, the answer appears to be no. In a seemingly
direct riposte to the Potter Stewart school of thought,
recent literature identified 60 distinct definitions of
innovation, prompting the derisive conclusion that
researchers had collectively abandoned the question of
definition entirely, leaving it “to the reader to intuitively
understand what is now a popular subject in
management literature.”3
When definitions are offered, they collectively lack
the coherence necessary to create a solid, common
foundation. Is innovation “the creation of new
knowledge and ideas to facilitate new business
outcomes,”4 “the effective application of processes
and products new to the organization and designed
to benefit it and its stakeholders,”5 “the generation,
acceptance, and implementation of new ideas,
processes, products, or services,”6 or something
else altogether?
The lack of a shared, accurate definition has
undermined our collective ability to manage innovation
effectively because we cannot determine what matters
and why.7 One study identified 9 factors and 31
subfactors that determined success.8 Another revealed
55 factors and a metastudy of the field itemized 42
subfactors clustered into 10 factors.9 In short, efforts to
understand innovation are looking at phenomena that
are the same in name only, so it is no surprise that there
are wildly different opinions about what matters most.10
How shall we get out of this muddle? We cannot adopt
the lexicographer’s conceit and attempt to derive a
definition from how the word is used. Yet on what basis
and with what authority would we – or anyone else, for
that matter – impose a definition?
The lack of a shared, accurate definition
has undermined our collective ability
to manage innovation effectively
because we cannot determine what
matters and why
No free lunch?
There is perhaps a third way: rather than infer or impose
a definition, we can perhaps derive one by following to
its logical conclusion the microeconomic theory at the
heart of modern competitive strategy.
In his 1996 article “What is strategy?” Harvard Business
School professor Michael E. Porter synthesizes over
20 years of writing, research and reflection on the
implications of microeconomic theory on business
competition.11 He concludes that different strategies
are defined by the trade-offs in the performance of the
activities that define the value created by a business
model.12 Porter illustrates this framework using two
dimensions of customer value: price and nonprice.
(Nonprice value is really a vector of all the different
dimensions of performance that customers want. For
instance, in the case of automobiles, these might be
safety, acceleration, styling, roominess and so on).
Delivering any given bundle of nonprice benefits always
incurs a cost – it is tough, after all, to get something for
nothing. The minimum cost required to achieve a
specified nonprice value is not some fixed Platonic ideal:
it is whatever cost is incurred by the lowest-cost provider
in the market. Similarly, the level of any nonprice value
that can be provided at any cost has a maximum: no
matter what you’re willing to pay, you cannot have a car
that goes from 0 to 60 in 2.8 seconds and gets 75 miles
per gallon in the city. The limits of what can be provided
at what cost describe the “productivity frontier” for a
business model at a point in time.
Deloitte | A Middle East Point of View | Fall 2013 | 39
A company’s strategy, then, is defined
by the trade-offs inherent in its
business model, or the activities it
performs in order to deliver value to
customers
Figure 1. The productivity frontier
Relative cost position
Productivity
frontier
High
Nonprice value
High
Source: Adapted from Michael E. Raynor, The Innovator’s
Manifesto, 2011
In figure 1, at point 1, a firm can appear to break
trade-offs and deliver greater nonprice value without
an increase in cost; that is, it can move “right” to point 2
(an increase in nonprice value) without moving “down”
(an increase in cost). This is because a firm is merely
wringing out inefficiencies that others already know
how to avoid. In other words, at point 1, it really can
get something for nothing by working smarter rather
than harder. Firms that have reached the frontier of
40 | Deloitte | A Middle East Point of View | Fall 2013
Once a firm gets to 2, however, that is as smart as it can
work: The frontier defines the limits of what is possible
at that moment. Of course, one could exploit different
types of trade-offs to reach a different point on the
frontier, competing instead at 3 by moving “up” (a
reduction in cost) from 1 without moving “left” (a
reduction in nonprice value). Once firms are at the
frontier, however, changes in cost and nonprice value
are inextricably linked: more of one necessarily means
less of the other. Thus, 2 and 3 are qualitatively different
strategies because they are at different points on the
same frontier.
A company’s strategy, then, is defined by the trade-offs
inherent in its business model, or the activities it
performs in order to deliver value to customers. A
company’s business model is strategically differentiated
to the extent that it exploits a different set of trade-offs
than its competition, choosing, for example, to provide
higher quality but at higher cost and hence price.
Low
Low
what a given business model can do are “operationally
excellent,” in Porter’s terms.
For all its power, this model is essentially static because
it takes the production possibility frontier (PPF) as given
and fixed. This is a useful assumption, but like many
assumptions, it eventually buckles under the weight of
accumulating reality. In the auto industry, for example,
the trade-off between cost and power has changed
dramatically over time.
Today, for example, one of the least expensive machines
that we are willing to call a “car” (a closed-body private
transportation device with a given passenger capacity
and range) is the Tata Nano. Its price (a proxy for relative
cost) is approximately USD 2,600, and it has 38
horsepower. At the other end of the spectrum is the
Bugatti Veyron, which at USD 1.9 million delivers 987
horsepower. These two automobiles define, to a
reasonable approximation, the PPF of the trade-offs
between cost and power in the commercial market for
automobiles (figure 2).
Deloitte Review
that many scooter owners aren’t upgrading to the Nano
because it isn’t viewed as a “real” car and car buyers
view the Nano as inexpensive and too akin to a
scooter.13 In other words, although the Nano falls
between a car and a scooter, it is still too close to a
scooter. Consequently, commercial success seems to lie
in being more like a car.
Figure 2. Production possibility frontiers in the
automotive industry
$/hp
Tata Nano
$2,600
38 hp
10
Ford Model T
$3,200
20 hp
100
Bugatti Type 35
$180K
140 hp
Bugatti Veyron
$1.9 million
987 hp
1000
2000
10
1000
Total hp
100
1920
2011
Source: Wikipedia; company websites; Deloitte analysis
It will come as no surprise that 90 years ago the industry
was subject to different constraints. In 1920, a good
candidate for the cheapest car generally available was
the Ford Model T, which cost USD 3,200 (in 2013
dollars) and delivered 20 horsepower. Back then it was
still a Bugatti (the Type 35) at the other extreme, which
cost USD 180,000 inflation-adjusted and delivered 140
horsepower.
It’s worth noting that breaking a trade-off does not
necessarily translate into commercial success: some
innovations disappoint when the trade-offs broken are
not broken in ways valued by customers. For example,
the Nano has faced some headwind in finding
marketplace acceptance. March 2013 Nano sales were
down 86 percent from a year prior and only 229,157
units have sold since inception. The reason seems to be
Independently of the commercial success, from an
engineering standpoint, this outward expansion in the
automotive sector’s PPF means that the combination
of cost per horsepower and total horsepower readily
available in a minivan today would have been
unfathomable to the engineers contesting Le Mans
during the interwar period. Such movement does not
pose a problem for Porter’s notion of strategy since
minivans in 2013 do not compete with racing cars from
1923. Yet this somewhat contrived example reveals how
the accretion of many small improvements over the
years can yield dramatic improvement overall.
Conceptually, of course, there is no difference between
any one of those small improvements and their
collective impact on automotive performance.
It’s worth noting that breaking a tradeoff does not necessarily translate into
commercial success: some innovations
disappoint when the trade-offs broken
are not broken in ways valued by
customers
Deloitte | A Middle East Point of View | Fall 2013 | 41
How then are we to think of those
products or services that expand
the frontier compared to their
contemporaries and, rather than
competing by making different sets
of trade-offs, compete by breaking
trade-offs? We propose that strategy
is defined by the trade-offs you exploit,
while innovation is defined by the
trade-offs you break.
How then are we to think of those products or
services that expand the frontier compared to their
contemporaries and, rather than competing by making
different sets of trade-offs, compete by breaking
trade-offs? We propose that strategy is defined by
the trade-offs you exploit, while innovation is defined
by the trade-offs you break.
Establishing the utility of a definition is not something
one does with regression equations or purely deductive
arguments. This definition will have to prove its worth
one case at a time and gain currency only through
adoption. To begin to make the case for defining
innovation this way, consider four competitive battles
and how viewing them through the lens of innovation
as “breaking trade-offs” brings into focus what
happened and why.
Beer and wings
In an oft-told tale, the structure of today’s American
beer market is a legacy of prohibition. With the repeal
of 1919’s 18th Amendment to the U.S. Constitution
through the passage of the 21st Amendment in 1933,
42 | Deloitte | A Middle East Point of View | Fall 2013
the manufacture and sale of alcohol was once again
legal. Americans, so the story goes, wanted their beer
cheap, fast, and in large quantities. The only breweries
that had managed to stay afloat were those big enough
to diversify into other businesses, and so America’s
brewing industry has long been dominated by a
relatively small number of megabrewers: today, the two
largest, both global players, have 75 percent market
share between them.14
Beginning in the 1970s, however, smaller microbreweries
began to crop up. Focusing on specialty formulations –
bocks, pale ales, wheat or honey beers and so on –
microbreweries brew small batches, distribute locally
and often use highly idiosyncratic ingredients and
processes. With 10 percent of the U.S. beer market
today, microbreweries see themselves as innovative and
are frequently described as such by the popular media.15
In truth, however, they are simply exploiting
cost/performance trade-offs to appeal to less pricesensitive segments of the beer market. They have not
found a way to make “better beer, cheaper.” Rather,
they sacrifice economies of scale in their supply chain,
production and distribution in the pursuit of other
dimensions of performance that matter to the
customers they court. They have not expanded the
frontier of the beer industry, merely staked a claim to
a different spot on the same frontier.
Megabrewers have responded by launching their
own craft beer brands, addressing increasing market
fragmentation with a careful balancing of production
efficiencies and product differentiation. Leveraging
production facilities and expertise, supply chains and
even marketing spend, the craft beer divisions of the
major brewers are really no different from traditional
line extensions one might see in any consumer products
industry. One of the majors in the United States has a
portfolio of over 250 craft labels, and megabrewer craft
brands are now growing faster than microbrewery
volumes.16 The result has been a new competitive
equilibrium in the beer market, with the majors taking
constant and careful measure of the craft beer segments
of the markets they serve.
Deloitte Review
Incumbents are not always able to mount such effective
responses to competitive incursions, however. Consider
the fate of established airlines at the hands of low-cost
carriers (LCCs). At one level, it is a mirror image of the
same problem the larger brewers faced. New entrants
popped up in response to regulatory changes that
allowed them to exploit different cost/performance
trade-offs that appealed to more price-sensitive
segments of the market for air travel. Incumbent
airlines typically responded in much the same way the
megabrewers responded to microbreweries, comparing
the marginal cost of leveraging existing assets such as
planes, airport gates, reservation systems, loyalty
programs and staff with the total cost of setting up
something from scratch. This strategy led them to
launch LCC divisions that were very often closely tied
to the core operations, just as the megabrewers have
done.
The major management consultancies
of the day overreacted because they
mistook mere differentiation for a true
innovation
Figure 3. Drivers of a major LCC’s cost advantage
over incumbent airlines
US networks and a major LCC (737-300: Stage length, seat
density, and factor cost adjusted)
12%
7.2
15%
70%
Yet the outcomes were far less favorable. Over a 13-year
period, there were six major attempts by incumbent
airlines to launch an LCC division, none of which proved
successful. Continental was first out of the gate with
Continental Lite (1993–1995), followed by United’s
Shuttle by United (1994–2001), whose run overlapped
with Delta’s Delta Express (1996–2003). US Air took a
kick at the can with MetroJet (1998–2001). Delta’s Song
(2003–2006) was a second at-bat for the Atlanta-based
carrier and United tried it again with Ted (2004–2009).
What kept going wrong?
The problem was that, unlike the microbrewery
challenge, the stand-alone LCCs were true innovators,
delivering comparable performance at a cost that
incumbents could not match (figure 3). They were
not merely exploiting trade-offs in the interests of
differentiation; they were breaking trade-offs, that
is, they were innovating.
Microbreweries opened up new growth opportunities
in the beer industry by creating products that appealed
more directly to what had been latent, unserved market
segments. The megabrewers’ response was effective at
least in part – and perhaps in large part – because the
Schedule
Process &
pace
Distribution
Frills
Other
Gap between Financial
avg. network structure
carrier and
major LCC
3%
Work rules,
Business
labor relations model
Other
Source: Adapted from Michael E. Raynor, The Innovator’s
Manifesto, 2011
organizational context of their response was appropriate
to the nature of the challenge. Faced with the need to
differentiate their product, they used the organizational
tools of differentiation but kept those elements of the
underlying business model that did not need to change.
This allowed them to exploit their inherent cost and
distribution advantages. Incumbent airlines, however,
mistook a true innovation for mere differentiation.
Consequently, when they too reached for the tools of
differentiation, their responses fell dramatically short.
Deloitte | A Middle East Point of View | Fall 2013 | 43
Treat an attack based on differentiation
as if it were breaking important tradeoffs and you will likely overreact, but
mistake a true innovator for the merely
different and the pain can last for
decades
It needn’t have turned out this way. What might have
happened had the megabrewers responded to the
microbreweries as if they were true innovators? How
bad could it have gotten for them? What if the airlines
had better understood the nature of the threat they
faced? How effective a response might they have
mounted? We can never know for sure, of course, but
for some insight into these questions, consider the
experiences of Intel in microprocessors and incumbent
management consulting firms during the dot-com era.
So far, this is just the beer example with higher capital
intensity. However, unlike the microbreweries and far
more similar to the case of the LCCs, AMD had set itself
on a trajectory of performance improvements that
promised to break the cost/performance trade-offs that,
at that time, defined Intel’s product roadmap. What
looked in cross section like a segmentation-based attack
was actually the beginning of one based on innovation.
Intel’s response was to establish a new unit in Israel, far
away from the core operations in Santa Clara, California,
to focus on building what would become the Celeron
processor. Based on the Pentium “chassis,” the Celeron
was a deliberate attempt to fight back with a lowercost, lower-priced, lower-performance microprocessor.
Launched in 1998, the Celeron’s performance improved
dramatically even as its price remained constant (figure
4). It quickly became the largest line of processors by
revenue in Intel’s history. Only in the last few years has
Intel phased out the Celeron and replaced it with Atom,
Intel’s new line of low-price microprocessors.
Figure 4. Price and performance of Intel microprocessors,
1985–2005
$1,200
Pentium 120 MHz
Silicon Valley vs. Silicon Alley
From 1985 to the end of the twentieth century, Intel
enjoyed near hegemony in the chip business thanks to
its ability to introduce increasingly faster chips on an
increasingly shorter life cycle. Yet in 1999, for the first
time, Advanced Micro Devices (AMD) had higher market
share than Intel in the U.S. retail desktop segment with
43.9 percent, thanks largely to its gains in the sub-USD
1,000 system segment.17
Pentium II
233MHz
$1,000
Pentium III
1 GHz
$800
i486DX2
$600
Pentium IV
2.2 GHz
80386DX
$400
$200
44 | Deloitte | A Middle East Point of View | Fall 2013
Celeron 266 MHz − 3.2 GHz
-8
5
Au
g87
Ju
n89
Ap
r-9
1
Fe
b93
De
c94
Oc
t-9
6
Au
g98
Ju
n00
Ap
r-0
2
Fe
b04
0
Oc
t
AMD had gained this lead by beginning early – in the
mid-1990s – to focus on less demanding tiers of the
market, where chips that were less powerful than the
best that Intel had to offer were welcomed with open
arms, especially since they were being sold at much
lower prices than Intel’s highest-performing products.
In other words, AMD captured a different segment of
the market by making different trade-offs among
dimensions of performance and cost.
Source: Adapted from Michael E. Raynor, The Innovator’s
Manifesto 2011,
Deloitte Review
Now cast your mind back to the late 1990s. Venture
capital partnerships prowl university campuses,
showering millions in seed financing on anyone who
could spell “dot com.” (At least it felt that way). No
industry seemed immune from the corrosive yet
generative, terrifying yet exhilarating impact of the
Internet, including management consulting. The socalled Fast Five (in a dig at the consulting arms of the
then Big Five accounting firms) of RazorFish, iXL, Scient,
Viant, and marchFirst were scooping up the cream of
the business school crop and securing high-profile
engagements with not just other start-ups but even
the incumbent firms’ major clients. With dot-com era
financing to sustain them, the Fast Five were eager
to take equity rather than cash in payment, and,
unencumbered by established process or allegedly
outdated paradigms, they promised a level of creativity
and insight mainstream firms couldn’t even aspire to.
After two or three years of this, even the bluest-blooded
consulting firms began to respond in ways Intel would
have recognized. They set up new divisions with new
names, new brands, new locations and seemingly
unprecedented autonomy. They looked for talent in
entirely new places, claiming that they didn’t want all
those MBAs after all, and that Ph.D. students in physics
and math were just what they needed. They aped the
“payment in equity” with some clients and developed
new compensation models, sometimes based on ghost
equity in the division itself in an effort to create the buzz
of a true e-consultancy and the high-powered reward
structures that implied.
None of it lasted long or amounted to much. Scient and
iXL became part of Razorfish, which is today part of
Publicis, a multinational advertising and public relations
company. Viant was acquired by divine inc., which went
bankrupt in 2003, and marchFirst went public in March
2000 and was defunct by May 2001. Most of the
mainstream consulting firms, if they talk about this
period at all, do so with some chagrin. Their new
divisions were closed, the ping pong tables disposed of,
the new business models and compensation systems
abandoned.
Providing high degrees of organizational
autonomy and developing new business
models seems to increase dramatically
the likelihood that one can eventually
break the trade-offs that define an
industry’s existing frontier. Taking
advantage of this insight, however,
demands that we apply this advice only
where appropriate – that is, where
innovation is in fact called for.
The major management consultancies of the day
overreacted because they mistook mere differentiation
for a true innovation. Thanks to the economic and
sociological phenomenon of the dot-com bubble, new
market segments emerged that wanted, for a time, a
different set of price/performance trade-offs. But the
e-consultancies that sought to capitalize on those
preferences had not created a new frontier. They were
at best seeking to exploit trade-offs and were a long
way from breaking them.
The end of the beginning
These case studies reveal the importance of
understanding at a fundamental level what is and isn’t
innovation. Treat an attack based on differentiation as if
it were breaking important trade-offs and you will likely
overreact, but mistake a true innovator for the merely
different and the pain can last for decades.
As these examples illustrate, at least some of what is
prescribed for successful innovation can be very
effective. Providing high degrees of organizational
Deloitte | A Middle East Point of View | Fall 2013 | 45
autonomy and developing new business models seems
to increase dramatically the likelihood that one can
eventually break the trade-offs that define an industry’s
existing frontier. Taking advantage of this insight,
however, demands that we apply this advice only
where appropriate – that is, where innovation is in
fact called for.
Figure 5. Matching organizational responses to competitive
opportunities and threats
Innovation
(Breaking
trade-offs)
Basis of market
opportunity
By consistently defining the underlying
phenomenon, perhaps it will be
possible to move beyond arguments
over the factors and subfactors of
innovation and engage the real
question: how to innovate effectively
Differentiation
(Exploiting
trade-offs)
Incumbent airlines
respond to low cost
carriers with LCC
divisions
Failed
Succeeded
Megabrewers respond
to microbreweries
with craft beer
brands
Differentiation
(Marginal cost analysis)
Intel responds to
AMD with the
highly autonomous
Celeron unit
Succeeded
Failed
Incumbent
consultancies respond
to e-consulting with
highly autonomous
divisions
Innovation
(Autonomy and
new activity sets)
Mechanisms of organizational response
Source: Adapted from Michael E. Raynor, The Innovator’s
Manifesto, 2011
Identifying these circumstances means having a
practical, accurate definition of innovation, and
“breaking constraints” would appear to meet these
criteria. In each of the four cases examined above, it
would have been possible to map the cost/performance
profiles of the market opportunities in play and
determine with sufficient precision whether innovation
or differentiation were likely to be the more effective
response (figure 5).
For innovation researchers, we hope our definition will
help bring some consistency to the field so that it can
emerge from its current pre-paradigmatic welter. By
consistently defining the underlying phenomenon,
perhaps it will be possible to move beyond arguments
over the factors and subfactors of innovation and
engage the real question: how to innovate effectively.
46 | Deloitte | A Middle East Point of View | Fall 2013
For practicing managers, who are deliberate or de
facto consumers of management theory, we hope our
definition will allow them to screen the advice they
receive and identify the nuggets that speak to the
problems they actually face. Is it any wonder that so
many see “predictable innovation” as an oxymoron
when so much of the advice on offer is actually targeted
at an entirely different outcome?
Whatever the merits of our definition, we remain
convinced that one is needed. Only when we attempt to
synthesize our elephant from the parts of an elephant
will innovation be a chimera no more.
by Michael E. Raynor, director with Deloitte Services
LP and its Innovation theme leader and Heather
A. Gray, manager with Deloitte Services LP
Deloitte Review
Endnotes
1 Joseph A. Schumpeter, Theory of Economic Development
(Cambridge, MA: Harvard University Press, 1934).
2 Jacobellis v. Ohio (1964).
3 Anthony Read, “Determinants of successful organisational
innovation: A review of current research,” Journal of
Management Practice 3, no. 1 (2000): pp. 95–119; Anahita
Baregheh, Jennifer Rowley, and Sally Sambrook, “Towards a
multidisciplinary definition of innovation,” Management Decision
47, no. 8 (2009): pp. 1323–1339.
4 Victor A. Thompson, “Bureaucracy and innovation,”
Administrative Science Quarterly (1965): pp. 1–20.
5 Michael A. West and Neil R. Anderson, "Innovation in top
management teams," Journal of Applied Psychology 81, no. 6
(1996): p. 680; most recently quoted in Alfred Wong, Dean
Tjosvold, and Chunhong Liu, "Innovation by teams in Shanghai,
China: Cooperative goals for group confidence and persistence,"
British Journal of Management 20, no. 2 (2009): pp. 238–251.
6 Marina Du Plessis, "The role of knowledge management in
innovation," Journal of Knowledge Management 11, no. 4
(2007): pp. 20–29.
7 Ian Barclay, "The new product development process: Past
evidence and future practical application, Part 1," R&D
Management 22, no. 3 (1992): pp. 255–264; Mary M. Crossan
and Marina Apaydin, "A multi-dimensional framework of
organizational innovation: A systematic review of the literature,"
Journal of Management Studies 47, no. 6 (2010): pp.
1154–1191; Richard Adams, John Bessant, and Robert Phelps,
"Innovation management measurement: A review," International
Journal of Management Reviews 8, no. 1 (2006): pp. 21–47.
8 Marisa Smith et al., "Factors influencing an organisation's ability
to manage innovation: A structured literature review and
conceptual model," International Journal of Innovation
Management 12, no. 04 (2008): pp. 655–676.
9 Garry L. Adams and Bruce T. Lamont, "Knowledge management
systems and developing sustainable competitive advantage,"
Journal of Knowledge Management 7, no. 2 (2003): pp.
142–154.
10 Gerben Van der Panne, Cees van Beers, and Alfred Kleinknecht,
"Success and failure of innovation: A literature review,"
International Journal of Innovation Management 7, no. 03
(2003): pp. 309–338.
11 Michael E. Porter, “What is strategy?” Harvard Business Review,
November/December 1996.
12 As a definitional aside, I used “business model” in the previous
section as it is a term in general use. I take it to be synonymous
with Porter’s notion of an “activity set,” and make this
substitution later in what is otherwise a rehearsal of Porter’s
argument.
13 Philip, Siddharth, “The World’s Cheapest Car Runs Out of Gas,”
Bloomberg Businessweek, April 15-21, 2013, p. 21.
14 Charlie Papazian, Bob Pease, and Dan Kopman, “Craft or crafty?
Consumers deserve to know the truth,” St. Louis Post-Dispatch,
December 13, 2012,
<www.stltoday.com/news/opinion/columns/craft-or-craftyconsumers-deserve-to-know-the-truth/article_e34ce949-d34a5b0f-ba92-9e6db5a3ed99.html>.
15 Devin Leonard, “Jack McAuliffe, father of American craft brew,
brings back New Albion Ale,” Businessweek, March 29, 2013,
<http://www.businessweek.com/articles/2013-03-29/jackmcauliffe-father-of-american-craft-brew-brings-back-new-albionale>; Brewers Association, “Craft brewing statistics: Facts,”
<http://www.brewersassociation.org/pages/business-tools/craftbrewing-statistics/facts>.
16 Papazian, Pease, and Kopman, “Craft or crafty?”; Brewers
Association, “Market Development Committee chain buyers sell
sheet & presentation notes and beer & food matching chart,”
<http://www.brewersassociation.org/pages/business-tools/chainbuyers-presentation>.
17 Intel Corporation in 1999. Stanford Business School case SM-70.
Deloitte | A Middle East Point of View | Fall 2013 | 47
Human capital
trends
EMEA and Global: more
similar than you think
48 | Deloitte | A Middle East Point of View | Fall 2013
Human capital trends
In a recent survey1 conducted with business leaders and
human resources (HR) executives world-wide, almost
identical top five trends were identified and similar top
three HR and Talent concerns were noted. While each
region has its own specifics and challenges, the below
highlights more commonality than difference in what is
driving the HR and Talent agenda today.
Top leading trends
The challenge for any organization, on the most basic
level, is having the right leadership and people with the
right skill sets in the company when you need them. In
practical terms, this means HR needs to be embedded
in the business and anticipate what programs they need
to execute for their business strategy and this will vary
based on the business. Regardless of the business model
however, there is a need to shift away from the basics
of HR operations and employee relations in order to
break the cycle of ineffective programs that lack focus
on direct organizational benefits or that solve business
problems.
Deloitte | A Middle East Point of View | Fall 2013 | 49
The trends that emerged as most highly relevant today
(currently shaping – or should be shaping – talent and
HR strategies and programs) include:
• The war to develop talent: the talent management
trend is switching from recruitment to development.
• Transforming HR to meet new business priorities: HR
transformation efforts are continuing to shift their
focus to business priorities, concentrating on areas
such as talent, emerging markets and the HR
organization.
• How boards are changing the HR game: to seize new
opportunities for sustainable growth and manage
heightened risks, boards of directors at highperforming organizations are pulling Chief Human
Resources Officers much deeper into business
strategy – and far earlier in the process.
• Organization acceleration: faced with tougher, more
numerous challenges, today’s organizations are
demanding more from their change initiatives by
pursuing strategies that are customized, precise,
and sustainable.
• Leadership.Next: yesterday’s leadership theories
are not keeping pace with the velocity of today’s
disruptive marketplace. Organizations are seeking
a new model for the age of agility.
Besides a difference in order of rank, the focus of EMEA
and Global are almost identical.
EMEA top 5 trends
6%
9%
7%
8%
24%
61%
War to
develop talent
25%
7%
10%
24%
60%
59%
Transforming
HR to meet new
business priorities
How boards
are changing
the HR game
5%
6%
12%
13%
28%
55%
Organization
acceleration
26%
54%
Leadership.Next
Global top 5 trends
5%
11%
23%
61%
War to
develop talent
6%
8%
25%
5%
8%
5%
28%
28%
61%
58%
Transforming
HR to meet new
business priorities
How boards
are changing
the HR game
11%
57%
Organization
acceleration
This trend is highly relevant today
This trend is relevant 3 years and beyond
This trend is relevant in the next 1-3 years
This trend is not applicable
50 | Deloitte | A Middle East Point of View | Fall 2013
7%
11%
27%
54%
Leadership.Next
Human capital trends
One trend highlighted as of high relevance today by
the smaller number of ME participants is “Branding the
workplace” which focuses on enhancing the talent value
proposition and innovating the talent brand. Talent
brand and corporate brand are two sides of the same
coin. Social media has erased whatever lines used to
exist between them.
Top three HR and Talent concerns
When executives were asked about the most pressing
talent and HR concerns facing them today, for Global as
well as EMEA, the top three turned out to be identical.
EMEA executives are almost equally concerned about
“developing leaders and succession planning” (49
percent) and “sustaining employee engagement” (46
percent). Global executives are even more concerned
about leadership development than their EMEA
counterparts; more than half of the executives (55
percent) reported that “developing leaders and
succession planning” is their top concern.
One of the pressing concerns is sustaining employee
engagement/morale which could indicate the high
priority of the first leading trend of EMEA, “the war to
develop talent.” In addition, connecting HR and talent
wih business critical priorities is a concern which is
linked to a leading trend called “transforming HR to
meet new business priorities.”
It is worth noting that the executives who participated
in the survey appear to recognize 2013 as a pivot point
in terms of economic expectations, with recession
fears fading and optimism growing, while their Gulf
counterparts were already in the optimism mode.
Conclusion
Given that the key global trends and issues are identical
across the regions, looking at how others are tackling
their HR and Talent issues should enlighten executives
into solving their own in a more effective way. Even
small missteps can have big unintended consequences
so paying attention to these trends can spell the
difference between success and failure.
Top three HR and Talent concerns (% of respondents)
EMEA 49%
Global 55%
#1
#2
#3
EMEA 46%
Global 39%
EMEA 35%
Global 33%
Developing leaders and succession planning
Sustaining employee engagement/morale
Connecting HR and talent with business critical priorities
It is worth noting that the executives
who participated in the survey appear
to recognize 2013 as a pivot point in
terms of economic expectations, with
recession fears fading and optimism
growing, while their Gulf counterparts
were already in the optimism mode
Endnotes
1 Deloitte, (2013) Resetting horizons: human capital trends 2013.
Deloitte Touche Tohmatsu Limited.
by Ghassan Turqieh, partner, Consulting, Deloitte
Middle East
Deloitte | A Middle East Point of View | Fall 2013 | 51
New thought leadership
publications from Deloitte
ME PoV provides you with a selection of Deloitte’s most recent
publications accessible on Deloitte.com
Real Estate
Public Sector
Private Equity
Financial Advisory
Saudi mortgage laws
A formula for a wellfunctioning market?
eHealth
Middle East
Public Sector
National necessities
MENA Private
Equity confidence
survey 2013
On the verge of a
new investment cycle
GCC Equity
Capital Markets
confidence survey
From a trot to
a canter?
Tax
Economics
Consulting
The Link Between
Transfer Pricing and
Customs Valuation –
2013 Country Guide
Global Economic
Outlook
3rd Quarter 2013
The open talent
economy
People and work in a
borderless workplace
52 | Deloitte | A Middle East Point of View | Fall 2013
Human Capital
Trends 2013
Leading indicators
Publications
Middle East
Point of View
Deloitte
Review
www.deloitte.com/middleeast
Health Care and
Life Sciences
Aerospace and
Defense
Impact of austerity
on European
pharmaceutical
policy and pricing
Staying competitive
in a challenging
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Rising above
the Clouds
Charting a course
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Global risk
management survey,
eighth edition
Setting a higher bar
TMT
ERS
Energy and Resources
Blurring the lines
2013 TMT Global
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Exploring Strategic
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300 executives around
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Connecting the
bright spots
Key components
of an oil and gas
governance
framework
Financial Services
Bank specialization
New strategies,
new risks?
Watertight solutions:
Global expertise for
the maritime and
ports industry
Deloitte | A Middle East Point of View | Fall 2013 | 53
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